Good morning,
Another week of churn beneath the market’s surface, even though the S&P 500 Index goes nowhere, has been the story of the month. While the S&P 500 looks to finish little changed, leadership continued to rotate aggressively. Severe price corrections in pockets of AI-driven technology and communications were offset by strength in the broader market — the “analog economy,” if you will — made up of businesses less dependent on AI infrastructure and hype cycles.
Despite the mixed tape and persistent crosscurrents, most primary trend indicators remain constructive, suggesting the path of least resistance still leans bullish for now.
That said, a few research observations — viewed collectively — are worth noting as we move closer to Q2 and the second half of the year.
First, from Ned Davis Research: an unusual combination of very high pessimism readings alongside new index price and breadth highs recently triggered. These two conditions rarely coexist. Extreme pessimism typically marks a bottom, not new highs. On the few historical occasions when this pairing has occurred, markets have tended to rally in the weeks immediately following the signal. However, in most instances, a bear market began roughly six months later. Rare does not mean irrelevant.
Second, earlier this week Torsten Slok, Chief Economist at Apollo Global Management, remarked:
“The U.S. economy continues to perform well. But the tail risks have increased from 10% to 30%.”
In statistical terms, the “tail” represents low-probability, high-impact outcomes — recession, financial accidents, credit events, geopolitical shocks, policy missteps, or liquidity freezes. A move from 10% to 30% suggests the probability of a significant negative disruption has roughly tripled. Not a forecast — but a meaningful shift in risk assessment.
Finally, the High-Low Logic Index registered its third-highest reading on record. Without diving into its construction, a high reading generally signals internal market conflict: many stocks simultaneously making new highs and new lows. In plain English, the market is struggling to find direction — somewhat “out of gear.” If this condition persists for several weeks, it can be consistent with a topping process.
Individually, each of these signals is manageable. In chorus, they warrant attention.
Most equity models remain bullish or neutral, and the primary trend is intact. Yet beneath the surface, the message is becoming more nuanced: momentum remains positive, but risk is rising. That does not mean a storm is imminent — but it does suggest we keep an umbrella within reach.
Be well,
Mike